Deducting Contributions: Retirement Plans for Business Owners (2025 IRS Guide)

This guide covers “Deducting Contributions” within retirement plans for business owners. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 560 (2025), Retirement Plans for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

• Setting up a SEP

• How much can I contribute

• Deducting contributions

• Salary reduction simplified employee pensions (SARSEPs)

• Distributions (withdrawals)

• Additional taxes

• Reporting and disclosure requirements

Publications

• 590-A Contributions to Individual Retirement Arrangements (IRAs)

• 590-B Distributions from Individual Retirement Arrangements (IRAs)

• 3998 Choosing a Retirement Solution for Your Small Business

• 4285 SEP Checklist

• 4286 SARSEP Checklist

• 4333 SEP Retirement Plans for Small Businesses

• 4336 SARSEP for Small Businesses

• 4407 SARSEP—Key Issues and Assistance

Forms (and Instructions)

• W-2 Wage and Tax Statement

• 1040 U.S. Individual Income Tax Return

• 1040-SR U.S. Tax Return for Seniors

• 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

• 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

• 8880 Credit for Qualified Retirement Savings Contributions

• 8881 Credit for Small Employer Pension Plan Startup Costs

A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan.

Under a SEP, you make contributions to an individual retirement arrangement (called a SEP IRA) set up by or for each eligible employee. A SEP IRA may either be a traditional IRA (a traditional SEP IRA) or a Roth IRA (a Roth SEP IRA). A SEP IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP IRA is maintained.

SEP IRAs are set up for, at a minimum, each eligible employee (defined below). A SEP IRA may have to be set up for a leased employee (defined in chapter 1), but doesn't need to be set up for excludable employees (defined later).

Deducting Contributions

Generally, you can deduct the contributions you make each year to each employee's SEP IRA. If you are self-employed, you can deduct the contributions you make each year to your own SEP IRA.

Deduction Limit for Contributions for Participants

The most you can deduct for your contributions to your or your employee's SEP IRA is the lesser of the following amounts.

1. Your contributions (including any excess contributions carryover).

2. 25% of the compensation (limited to $350,000 per participant) paid to the participants during 2025, from the business that has the plan, not to exceed $70,000 per participant.

In 2026, the amounts in (2) above increase to $360,000 and $72,000, respectively.

Deduction Limit for Self-Employed Individuals

If you contribute to your own SEP IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions.

• The deduction for the deductible part of your self-employment tax.

• The deduction for contributions to your own SEP IRA.

The deduction for contributions to your own SEP IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP IRA indirectly by reducing the contribution rate called for in your plan. To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Carryover of Excess SEP Contributions

If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit.

Excise tax.

If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4.

When To Deduct Contributions

When you can deduct contributions made for a year depends on the tax year for which the SEP is maintained.

• If the SEP is maintained on a calendar-year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends.

• If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year.

Example.

You are a fiscal-year taxpayer whose tax year ends June 30. You maintain a SEP on a calendar-year basis. You deduct SEP contributions made for calendar year 2025 on your tax return for your tax year ending June 30, 2026.

Where To Deduct Contributions

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U.S. Return of Partnership Income; and corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S, U.S. Income Tax Return for an S Corporation.

Sole proprietors and partners deduct contributions for themselves on line 16 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you receive from the partnership.)

Caution:

Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 560 (2025), Retirement Plans for Small Business: Simplified Employee Pensions (SEPs) — Deducting Contributions — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.